China Cashes In On Its Stance in Currency Crisis

While Beijing’s pledge to maintain its currency’s value has meant economic losses, its sacrifice for the sake of regional stability also has brought political gain.

This week, China used that clout to push the U.S. and Japan to stop the yen’s slide, say economists who met with China’s top officials. In the process, China strengthened its regional role at Japan’s expense.

“China has raised its profile and essentially undermined Japan,” said Robert Broadfoot, a director of Political & Economic Risk Consultancy Ltd. in Hong Kong. “Suddenly, China sounds like a member of the G-7.”

After U.S. Treasury officials declared last week that they would not support Japan’s currency, Beijing warned that it would have to devalue if the yen dropped much farther.

Ironically, a weak yen may not be damaging Beijing as much as it claims, economists say. Yet who could risk ignoring China’s warnings? Its stable yuan is considered the last fire wall between Asia’s financial turmoil and the United States’ vibrant economy. To devalue would probably spark another round of crises in Asia, which could cause markets all the way to Wall Street to plunge.

On Wednesday, the U.S. reversed course and joined Japan in a surprise intervention to bolster the yen.

“For the first time, China has demonstrated the kind of muscle it is going to flex on the world’s financial and economic stage,” said Kenneth Courtis, a Tokyo-based senior economist for Deutsche Bank, after meeting this week with China’s premier and economic czar, Zhu Rongji.

“A week before Clinton comes to China, Beijing put the U.S. in a position where Clinton would arrive for the summit, and the first thing he would hear was how America was jeopardizing all of East Asia.”

China committed early on in Asia’s year-old financial crisis to hold the yuan steady, even though its neighbors’ falling currencies made their exports cheaper than China’s. Like a mantra, top Chinese officials have said over and over that they would stick to their pledge, winning them loud praise.

In a speech on China last week, President Clinton lauded Beijing’s self-restraint.

“China has been a helpful partner in international efforts to stabilize the Asian financial crisis,” he told the National Geographic Society in Washington. “In resisting the temptation to devalue its currency, China has seen that its own interests lie in preventing another round of competitive devaluations that would have severely damaged prospects for regional recovery. It has also contributed to the rescue packages for affected economies.”

Between the lines is support for China’s long-sought entry into the World Trade Organization, with special concessions an implicit reward for the country’s stabilizing role in the region--including mediating with Pakistan and North Korea on nuclear issues.

“There is definitely political mileage to be made out of not devaluing,” says Richard Margolis, managing director of Merrill Lynch & Co. in Hong Kong. “China is trying to assume a statesmanlike role, to win a seat at the top table in deliberations of all these issues.”

But this week, China made clear its displeasure at the costs of maintaining the yuan. On Wednesday, Sun Zhenyu, China’s vice minister of foreign trade, sent a distinct warning: “If the change in the exchange rate puts large pressure on foreign trade and exports, or if there is a large fall in foreign trade or exports, I am afraid we may have to consider the question of adjustments.”

Washington officials privately denied that China exerted any direct, behind-the-scenes pressure to halt the yen’s decline, though its public warnings were taken seriously.

As it happens, the falling yen wasn’t exactly wrecking China. It has $140 billion in foreign exchange reserves and a healthy trade balance. Though China’s export statistics for May show a drop of 1.5% compared with last year, China’s economy was still sound in the first quarter: Exports actually increased by about 12%, and foreign direct investment rose about 10% as investors moved money to China from more volatile markets.

Few of the country’s key exports compete directly with Japan’s, unlike South Korea, which goes head to head with Japan on nearly half of its products sent overseas, from electronics to steel.

“China won’t devalue until there’s real proof that they’ve lost their competitive edge,” Broadfoot said. “There’s no real evidence of that yet.”

For now, Japan’s falling yen is a convenient cover for some of China’s own domestic problems. In the next few years, the country must try to sort out a dangerously high ratio of bad debts, streamline an inefficient state sector and reform an opaque banking system. In short, it has many of the same problems that attracted speculative attacks on the currencies of its neighbors in the past year.

So while China has experienced some economic damage, its biggest grievance has been political, Courtis said.

“There was a contradiction in U.S. policy: The Americans put intense pressure on China not to devalue but appeared to have a hands-off policy with Japan,” he said. “But Beijing felt that contradiction released them from their commitment to not devalue. That threat, or communication, finally led [U.S. Treasury Secretary Robert E.] Rubin to blink.”

For China, this is a crucial time. The country desperately needs to maintain economic momentum to carry along its radical industrial restructuring that will put millions out of work. Asia’s falling stock markets and credit squeeze mean that much-needed investment capital is drying up.

China needs $25 billion in foreign direct investment to reach its targeted 8% growth for the year, officials said Thursday, but economists estimate it is only procuring a fraction of that.

Tokyo’s unrestrained yen rate was the last straw. This week, Beijing threw down a political gauntlet: Why should China be prevented from carrying out its reforms because Japan refuses to tackle its own?

Times staff writer Art Pine in Washington contributed to this report.